Employers’ body warns business secretary that his proposal risks turning shareholders into ‘micro-managers’

Vince Cable will be warned on Wednesday that he risks turning shareholders into “micro-managers” when he launches a consultation on handing investors extra powers to clamp down on executive pay.

The business secretary is being urged by the CBI, the employers’ body, not to press on with his plans to give shareholders a “binding” vote on remuneration as he prepares to endorse a report calling for the creation of a much stronger UK equivalent of Germany’s Mittelstand, the small and medium-sized business sector.

Before the formal launch of the consultation on executive pay, John Cridland, the director general of the CBI, said: “Shareholders already have the power to influence company pay strategy. They do this through the advisory vote, but if this is not taken into account they have the power to remove the chair of the remuneration committee, or ultimately the board.

“Binding votes do not strengthen the role of shareholders as responsible owners, but instead blur the distinction between shareholders and executives. They risk turning shareholders into micro-managers who are expected to second-guess executive decisions at every turn, hampering the effective day-to-day management of the business,” Cridland added.

The precise details of the consultation will be announced on Wednesday, but when Cable unveiled his proposals in January he said he wanted the existing advisory vote to remain but for two legally binding votes to be introduced on pay deals for the coming year and on any pay deals that represent more than a year’s salary.

The consultation is being launched as the Ownership Commission, set up by the Labour government in 2010, calls for an overhaul of the British economy to give a bigger role to mutuals, co-operatives, private companies and employee-owned firms to promote more “responsible capitalism”. It calls for the creation of a stronger Mittelstand, which in Germany is supported by a network of regional and national institutions, planning bodies and research organisations that encourage a long-term approach to business. The report, whose authors include Sir Roger Carr, chairman of the CBI, and Lady Sylvia Jay, vice-chairman of L’Oréal in the UK and Ireland, says Britain could do far more to encourage “plurality of corporate ownership, better stewardship of companies, as well as promoting greater engagement between employees and shareholders”.

It says the UK should expand the number of small and medium-sized companies through tax incentives and the creation of new national and local institutions “to support SMEs with more generous flows of credit and equity, innovative new technology and skilled workers”. Measures should be adopted to make it easier for mutuals to raise external capital, while employee-owned companies “shouldn’t be taxed inappropriately”.

The report has received backing from a wide range of politicians, businessmen and academics. Prof Ajay Bhalla, of Cass Business School, said: “Germany’s SME sector is bigger than ours, better supported by government and is the force behind the country’s export boom.”

Bhalla said research by Cass showed that in recessions, employee-owned and family-owned firms were more likely to invest and hire workers, and less likely to retrench than large public companies that had to answer to shareholders’ short-term demands. “This demonstrates that a more balanced [corporate] ownership profile would make the economy more resilient,” he said. It would also allow investors and savers more avenues in which to invest, and give consumers more choice.

Will Hutton, chairman of the commission, said: “Our report is a nail in the coffin for capitalism’s dark side; if our measures are adopted it would create a capitalism that delivers more effectively to citizens, savers and employees. Only 2% of our companies are co-operatives; only 2% are employee-owned, we’re simply not at the races when compared to Germany.”

The commission also proposes that companies should set out their approach to employee and investor engagement in their annual reports and that employee ownership should be actively encouraged from employee share ownership schemes to fully-fledged employee owned companies.

Hutton added: “The financial crisis and the protracted problems in its wake has opened up the debate about how well our economy is owned, run and managed.Good ownership is indissolubly linked to good capitalism.”

Another of the Ccommission’s report’s authors, Charlie Mayfield, the boss of staff-owned John Lewis, said: “I welcome the call for government to promote a greater plurality of ownership and I see employee-owned businesses playing a key role within that agenda.”